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Ebookfiles 8418
Ebookfiles 8418
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Accounting Information Systems 9th Edition Hall
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Name: Class: Date:
Chapter 06 The Expenditure Cycle Part II: Payroll Processing and Fixed Asset
Procedures
True / False
1. Time cards are used by cost accounting to allocate direct labor charges to work in process.
a. True
b. False
ANSWER: False
3. Most small organizations integrate payroll processing with the human resource management (HRM) system.
a. True
b. False
ANSWER: False
6. Because a time clock is used, no supervision is required when employees enter and leave the work place.
a. True
b. False
ANSWER: False
7. Inventory control performs the formal record keeping function for fixed assets.
a. True
b. False
ANSWER: False
9. Authorization to dispose of fixed assets should be issued by the user of the asset.
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Chapter 06 The Expenditure Cycle Part II: Payroll Processing and Fixed Asset
Procedures
a. True
b. False
ANSWER: False
11. Ideally, payroll checks are written on a special bank account used only for payroll.
a. True
b. False
ANSWER: True
12. The supervisor is the best person to determine the existence of a “phantom employee” and should distribute
paychecks.
a. True
b. False
ANSWER: False
13. Payroll processing can be automated easily because accounting for payroll is very simple.
a. True
b. False
ANSWER: False
15. Fixed asset accounting systems include cost allocation and matching procedures that are not part of routine
expenditure systems.
a. True
b. False
ANSWER: True
16. Asset maintenance involves only the recording of depreciation charges. Physical improvements are always
expensed.
a. True
b. False
ANSWER: False
17. Fixed asset systems must keep track of the physical location of each asset to promote accountability.
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Procedures
a. True
b. False
ANSWER: True
18. Time cards capture the total time an individual worker spends on each production job.
a. True
b. False
ANSWER: False
19. Accounting conventions and IRS rules sometime specify the depreciation parameters to be used.
a. True
b. False
ANSWER: True
20. The fixed asset disposal report authorizes the user department to dispose of a fixed asset.
a. True
b. False
ANSWER: False
21. Work centers provide the personnel action form, which triggers the payroll process.
a. True
b. False
ANSWER: False
22. The payroll department is responsible for both updating the employee records and writing paychecks.
a. True
b. False
ANSWER: True
24. Inventory control authorizes fixed asset purchases with a purchase requisition.
a. True
b. False
ANSWER: False
25. When fixed assets are received, the receiving clerk sends copies of the receiving report to the inventory
control clerk and the AP clerk.
a. True
b. False
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Chapter 06 The Expenditure Cycle Part II: Payroll Processing and Fixed Asset
Procedures
ANSWER: False
Multiple Choice
26. The document that captures the total amount of time that individual workers spend on each production job is
called a
a. time card
b. job ticket
c. personnel action form
d. labor distribution form
ANSWER: b
28. Which internal control is not an important part of the payroll system?
a. Supervisors verify the accuracy of employee time cards.
b. Paychecks are distributed by an independent paymaster.
c. Accounts payable verifies the accuracy of the payroll register before transferring payroll funds to the general
checking accounting.
d. General ledger reconciles the labor distribution summary and the payroll disbursement voucher.
ANSWER: c
30. Depreciation
a. is calculated by the department that uses the fixed asset
b. allocates the cost of the asset over its useful life
c. is recorded weekly
d. results in book value approximating fair market value
ANSWER: b
Chapter 06 The Expenditure Cycle Part II: Payroll Processing and Fixed Asset
Procedures
31. Depreciation records include all of the following information about fixed assets except
a. the economic benefit of purchasing the asset
b. the cost of the asset
c. the depreciation method being used
d. the location of the asset
ANSWER: a
34. Which of the following is not a characteristic of the fixed asset system?
a. Acquisitions are routine transactions requiring general authorization.
b. Retirements are reported on an authorized disposal report form.
c. Acquisition cost is allocated over the expected life of the asset.
d. Transfer of fixed assets among departments is recorded in the fixed asset subsidiary ledger.
ANSWER: a
36. Where does the responsibility lie for reconciling the labor distribution summary and the payroll
disbursement voucher?
a. cash disbursements
b. cost accounting
c. personnel
d. general ledger
ANSWER: d
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Chapter 06 The Expenditure Cycle Part II: Payroll Processing and Fixed Asset
Procedures
38. In a manufacturing firm, employees use time cards and job tickets. Which of the following statements is not
correct?
a. Job tickets are prepared by employees for each job worked on, so an employee may have more than one job
ticket on a given day.
b. An individual employee will have only one time card.
c. The time reported on job tickets should reconcile with the time reported on time cards.
d. Paychecks should be prepared from the job tickets.
ANSWER: d
39. Which department is responsible for approving changes in pay rates for employees?
a. payroll
b. treasurer
c. personnel
d. cash disbursements
ANSWER: c
41. Why would an organization require the paymaster to deliver all unclaimed paychecks to the internal audit
department?
a. to detect a “phantom employee” for whom a check was produced
b. to prevent an absent employee’s check from being lost
c. to avoid paying absent employees for payday
d. to prevent the paymaster from cashing unclaimed checks
ANSWER: a
42. Which of the following is not a reasonable control for fixed assets?
a. Proper authorization is required for acquisition and disposal of fixed assets.
b. Fixed asset records show the location of each asset.
c. Fully depreciated assets are immediately disposed of.
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d. Depreciation policies are in writing.
ANSWER: c
44. Payroll uses time card data to do all of the following except
a. prepare the payroll register
b. update employee payroll records
c. prepare the labor distribution summary
d. prepare paychecks
ANSWER: c
47. Accounting records that provide the audit trail for payroll include all of the following except
a. time cards
b. job tickets
c. payroll register
d. accounts payable register
ANSWER: d
48. Personnel action forms are used to do all of the following except
a. activate new employees
b. terminate employees
c. record hours worked
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Procedures
d. change pay rates
ANSWER: c
50. The document that records the total amount of time spent on a production job is the
a. time card
b. job ticket
c. labor distribution summary
d. personnel action form
ANSWER: c
51. A control technique that can reduce the risk of a terminated employee being paid is
a. a security camera viewing the time clock
b. the supervisor taking attendance during the shift
c. paychecks being distributed by an independent paymaster
d. reconciliation of time cards and job tickets
ANSWER: c
53. All of the following are processed by the fixed asset system except
a. sale of unneeded equipment
b. purchase of raw materials
c. repair of production equipment
d. purchase of a new plant
ANSWER: b
54. The fixed asset system performs all of the following except
a. determines the need for new assets
b. maintains depreciation records
c. records retirement and disposal of assets
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d. tracks the physical location of fixed assets
ANSWER: a
56. Depreciation
a. assures that assets are reported at fair market value
b. is discretionary for many firms
c. allocates the cost of an asset over its useful life
d. is the responsibility of the department using the asset
ANSWER: c
57. The fixed asset system is similar to the expenditure cycle except
a. fixed asset transactions are non-routine and require special authorization and controls
b. fixed assets are capitalized, not expensed
c. both a and b
d. none of the above
ANSWER: c
59. The fixed asset systems does all of the following except
a. records acquisition of assets
b. records improvements to assets
c. estimates the fair market value of assets in service
d. records the disposal of assets
ANSWER: c
Chapter 06 The Expenditure Cycle Part II: Payroll Processing and Fixed Asset
Procedures
d. must follow formal authorization procedures
ANSWER: d
61. Which of the following uses fingerprint or hand-vein scan technology to produce the time and attendance
file?
a. Biometric time clocks
b. Magnetic swipe ID cards
c. Mobile remote devices
d. Proximity cards
ANSWER: a
62. Which of the following works like a credit card with the time clock?
a. Biometric time clocks
b. Magnetic swipe ID cards
c. Mobile remote devices
d. Proximity cards
ANSWER: b
63. Which of the following works through wallets, purses and card holders?
a. Biometric time clocks
b. Magnetic swipe ID cards
c. Mobile remote devices
d. Proximity cards
ANSWER: d
64. Which of the following is popular among businesses with employees in the field who travel between clients
and companies with foreign-based employees?
a. Biometric time clocks
b. Magnetic swipe ID cards
c. Mobile remote devices
d. Proximity cards
ANSWER: c
65. Which of the following is not an input control to reduce the risks of data entry errors and payroll fraud for a
company with a mobile or distributed work force?
a. limit tests that detect excessive hours
b. check digits that detect transcription errors in employee identification
c. biometric scanners, swipe cards, and PINs
d. multilevel security that achieves segregation of duties
ANSWER: d
Chapter 06 The Expenditure Cycle Part II: Payroll Processing and Fixed Asset
Procedures
66. Describe an internal control procedure that would prevent an employee from punching the time clock for
another, absent employee.
ANSWER: supervision of the time clock at the start of the shift
68. Describe an internal control procedure that would prevent a supervisor from stealing the unclaimed
paychecks of employees who have been terminated.
ANSWER: This type of fraud can be reduced or eliminated by using a paymaster to distribute paychecks to employees in
person. Any uncollected paychecks are then returned to payroll. Also, mail final paychecks to terminated
employees.
69. Why should employee paychecks be drawn against a special checking account?
ANSWER: A separate imprest account is established for the exact amount of the payroll based on the payroll summary.
When the paychecks are cashed, this account should clear, leaving a zero balance. Any errors in checks
(additional checks or abnormal amounts) would result in a non-zero balance in the imprest account and/or
some paycheck would not clear. This will alert management to the problem so corrective action can be taken.
70. Why should employees clocking on and off the job be supervised?
ANSWER: A form of payroll fraud involves employees clocking the time cards of absent employees. By supervising the
clocking in and out process, this fraud can be reduced or eliminated.
72. In a manufacturing firm, employees typically fill out two different documents regarding their time worked.
What are they? Why are there two?
ANSWER: The two documents are the time card and the job ticket. Two are required because the time card records all the
time worked by an employee during the period while the job ticket details the time by project or job.
73. List two types of authorization required in the fixed asset system.
ANSWER: authorization to purchase the asset and to dispose of the asset
75. Which documents prompt the fixed asset department to create a fixed asset record?
ANSWER: the receiving report and the cash disbursement voucher
76. Describe an internal control that would prevent an employee from stealing a computer and then reporting it
as scrapped.
ANSWER: Supervisors must authorize the disposal of the computer. Unless so authorized, the record will continue to
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Chapter 06 The Expenditure Cycle Part II: Payroll Processing and Fixed Asset
Procedures
show that the employee is responsible for the computer.
77. Describe an internal control that would prevent the payment of insurance premiums on an automobile that is
no longer owned by the company.
ANSWER: Perform an annual physical inventory of fixed assets and adjust the records to reflect assets no longer on hand.
Prepare reports about the disposal of assets.
78. Describe an internal control that would prevent the charging of depreciation expense to the maintenance
department for a sweeper that is now located in and used by the engineering department.
ANSWER: Prepare reports about the transfer of fixed assets. Perform an annual physical inventory and note the location
of assets. Budget and then hold each department accountable for depreciation expense for assets located in
each department.
79. Describe an internal control that would prevent the acquisition of office equipment which is not needed by
the firm.
ANSWER: A higher organizational level or other appropriate person authorizes fixed asset acquisitions; part of the
authorization is showing that a need for the asset exists.
81. Explain the purpose of each of the following documents used in the payroll system:
the personnel action form, the job ticket, the time card.
ANSWER: The personnel action form is a document that identifies employees who should receive a paycheck; reflects
changes in pay rates, payroll deductions, and job classifications.
The job ticket collects information on the time individual workers spend on each production job.
The time card captures the total time that an employee is at work.
82. How do fixed asset systems differ from the expenditure cycle?
ANSWER: The fixed asset system processes non-routine transactions for a wider group of users in the organization than
the expenditure cycle. Further, the expenditure cycle processes routine acquisitions of raw materials
inventories for the production function and finished goods inventories for the sales function. The expenditure
cycle transactions are often automatically approved by the system, while fixed asset transaction approvals
typically demand individual attention due to the uniqueness of the transactions.
83. What is recorded by the asset maintenance part of the fixed asset system?
ANSWER: periodic depreciation following an approved depreciation schedule and physical improvements to the asset to
increase the subsidiary account and to adjust the depreciation schedule
84. How are the following carried out in the fixed asset system: authorization, supervision, independent
verification?
ANSWER: Independent authorization is required to acquire an asset and to formalize the depreciation schedule.
Supervision must be exercised over the physical assets.
Independent verification must confirm the location, existence, and condition of the assets.
Chapter 06 The Expenditure Cycle Part II: Payroll Processing and Fixed Asset
Procedures
ANSWER: The personnel department via the personnel action form
86. Erroneous data in the payroll system can corrupt WIP, employee records, and the payroll register. What edit
controls will minimize this risk?
ANSWER: 1. Controls including checks for missing data, numeric-alphabetic data, and invalid data values will reduce the
risk of undetected data entry errors by clerks in the cost accounting, personnel, payroll, accounts payable, and
cash disbursements departments.
2. Check digit control will provide control over accessing the wrong employee records by payroll and personnel
clerks.
87. Describe three process controls that pertain to payroll application logic.
ANSWER: 1. Error messages. Any mismatch when posting time card or personnel action data to employee records
should produce an error message to the computer operator.
2. Passwords. Password control should be implemented on department computers to reduce the risk of
unauthorized access to payroll files. The system logic should require, and prompt, users to change passwords
periodically. Only strong passwords consisting of six to eight alphabetic and numeric characters should be
accepted.
3. File Backup. Backup procedures need to be in place to reduce the risk of data loss due to file destruction
and/or corruption.
Essay
88. The Golf Club Company makes custom golf clubs. The manufacturing supervisor interviews people who have
specialized manufacturing skills, and then informs payroll when an employee is hired. The employees use a time clock to
record the hours they work. The employees are also required to keep a record of the time they spend working on each
order. The supervisor approves all time cards.
The accountant analyzes the job tickets and prepares a labor distribution summary. Payroll prepares the payroll register
and paychecks. The supervisor distributes the paychecks to the employees. Payroll informs cash disbursement of the funds
required to cover the entire payroll amount. The cash disbursements clerk ensures that there are adequate funds in the
company’s regular checking account to cover the payroll.
Describe at least three internal control weaknesses; for each weakness suggest an improvement to internal control.
ANSWER: Weakness: The supervisor could be creating fictitious employees. The supervisor has too many incompatible
duties; he/she hires workers, approves the time cards, and distributes the paychecks.
Improvement: Segregate duties. Personnel should hire employees and a paymaster should distribute
paychecks.
Weakness: Employees could be paid for time they do not work; a co-worker could record an absent worker as
present (punch the time clock).
Improvement: Supervise the time clock. Reconcile time cards and job time tickets.
Weakness: Payroll has authorization and transaction processing responsibilities. Payroll is authorizing the
disbursement to fund the entire payroll. Accounts payable is not part of the system.
Improvement: Segregate duties; accounts payable should verify the accuracy of the payroll register and create
a disbursement voucher.
Weakness: Payroll is funded through the general checking account.
Improvement: Paychecks should be written on a separate payroll account.
89. Explain the integration of payroll with the human resource management (HRM) system that often happens
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Chapter 06 The Expenditure Cycle Part II: Payroll Processing and Fixed Asset
Procedures
in moderate- and large-sized organizations.
ANSWER: The HRM system captures and processes a wide range of personnel-related data, including employee benefits,
labor resource planning, employee relations, employee skills, internal training, personnel actions (pay rates,
deductions and so on), and payroll processing. HRM systems provide real-time access to personnel files for
purposes of direct inquiries and making changes in employee status as they occur. Human resources clerks
enter data into the employee record file in real time from terminals.
90. Three major tasks are handled by the fixed asset system. What is the purpose of each? What special control
issues affect each?
ANSWER: Asset acquisition handles the steps leading to the acquisition of new fixed assets: recognition of need,
authorization and approval, possible capital investment analysis, and selection of supplier. Because of the
value of fixed assets, special approvals are needed.
Asset maintenance involves adjusting the subsidiary account balances for depreciation, improvements, and
tracking location. Control involves accountability by keeping track of the physical location of each asset.
Asset disposal handles the removal of assets from the subsidiary ledger when the asset is taken out of
service. This requires special approval and preparation of a disposal report.
91. The Baccus Corp. manufactures medical equipment. This is a capital-intensive industry and investments in fixed
assets exceed $5 million a year. The minimum cost for production equipment is $75,000. When supervisors want new
production machinery, they contact the plant manager. The plant manager approves or denies the request based on
discussions with the production supervisor, the repair and maintenance supervisor, and the quality control supervisor.
A purchase order is prepared by the purchasing department and sent to one of the three major suppliers of production
machinery for medical equipment. The equipment is delivered immediately to the production floor and put into service. At
the end of the month, the production supervisor informs the general ledger clerk about the receipt of the machinery. The
general ledger clerk establishes an asset record for the machine. At the end of the year, the general ledger clerk computes
straight-line depreciation based on a 10-year life with a 10 percent salvage value. Depreciation expense is recorded as a
direct reduction of the asset cost.
The repair department performs routine maintenance on all of the production equipment. Occasionally the repair
department rebuilds a machine to extend its useful life. All of the costs associated with the repair department are charged
to manufacturing overhead. When a machine becomes obsolete, production employees move it to a corner of the factory
floor and break it down so that parts can be used in other machines. Production employees routinely remove parts for
personal use. Some smaller machines have disappeared completely from the factory floor.
The general ledger clerk takes a physical inventory every three years. About 75 percent of the fixed assets can be located
and identified. Other assets have serial numbers that are inaccessible, so the item cannot be matched to a fixed asset
record. Some fixed asset records cannot be traced to an actual item. Several machines that have been scrapped and are
being used for spare parts were matched to fixed asset records. At the last inventory, the general ledger clerk did not make
any adjustments to the fixed asset records, explaining that 75 percent accuracy in the fixed asset physical inventory was
excellent.
Describe five internal control weaknesses and explain how to correct them.
ANSWER: Weakness: There is no written documentation of the approval for purchase.
Improvement: Fixed asset acquisitions should be formal and explicitly authorized. Each transaction should be
initiated by a written request from the user or department. For high-value items, the authorization process
should include a formal cost-benefit analysis and the solicitation of bids from suppliers.
Chapter 06 The Expenditure Cycle Part II: Payroll Processing and Fixed Asset
Procedures
Weakness: Fixed assets are delivered directly to the factory floor.
Improvement: All purchases should go through the receiving department before delivery.
Weakness: The production supervisor notifies the general ledger clerk about the receipt of fixed assets.
Improvement: The receiving department should send a copy of the receiving report to the fixed asset
department.
Weakness: The general ledger clerk is maintaining fixed asset records.
Improvement: The fixed asset department should maintain fixed asset records.
Weakness: Depreciation is computed using a standard method, asset life, and salvage value.
Improvement: The method of depreciation used should reflect, as closely as possible, the asset’s actual decline
in utility. The internal auditor should also review and verify the depreciation periodically.
Weakness: Depreciation is recorded as a direct reduction of the asset cost.
Improvement: Depreciation should be recorded in an accumulated depreciation account for each asset.
Weakness: Costs to rebuild a machine is charged to manufacturing overhead.
Improvement: Physical improvements that increase an asset’s value or extend its useful life should be treated
as new asset acquisitions (an adjustment to the asset account).
Weakness: There is no authorization to scrap an obsolete machine.
Improvement: Obtain written authorization from management before a machine is scrapped.
Weakness: Employees remove equipment and equipment parts from the premises without authorization.
Improvement: Employees should receive explicit approval from a supervisor before removing parts or
equipment from the factory.
Weakness: The general ledger clerk is conducting the physical inventory and maintaining the record keeping.
Improvement: The internal auditor, not the general ledger clerk, should be taking the physical inventory count.
Also, the physical count should occur more frequently.
Weakness: Fixed assets cannot be matched with records.
Improvement: Apply easily accessible labels to identify fixed assets.
Weakness: Fixed assets cannot be located and are not removed from the books.
Improvement: Fixed assets that cannot be located must be removed from the fixed asset records.
Weakness: Fixed assets that are scrapped remain on the books.
Improvement: Assets that are scrapped should be removed from the fixed asset records.
Weakness: The clerk regards 75% accuracy as excellent.
Improvement: Acceptance of 75% accuracy is poor. Any variation should be investigated and records updated.
This should be done by the internal auditor.
92. Discuss outsourcing the payroll function. What are the advantages and risks?
ANSWER: Many organizations outsource their payroll function by transferring all payroll processing tasks to a third-party
provider. The service provider performs all the payroll functions and may receive data either from the firm or
directly from the workers. The service provider must have access to sensitive internal information such as
Social Security numbers and bank account information.
The primary advantage of outsourcing is cost savings. The client organization avoids the salaries and benefit
cost of an in-house payroll department, as well as continuing education required to keep up with ever-
Chapter 06 The Expenditure Cycle Part II: Payroll Processing and Fixed Asset
Procedures
changing payroll laws.
The risks are significant. An outside organization will have access to confidential employee data and the client
firm’s financial resources. The service provider may have poor internal controls or act incompetently, which
could result in material errors or fraud. Outsourcing payroll does not relieve the client organization of its
responsibility for implementing adequate internal controls.
93. Discuss the fundamental risk and control issues associated with fixed assets that are different from raw materials and
finished goods.
ANSWER: Authorization Controls. Because fixed assets are requested and employed by end-users, asset acquisitions
should be formal and explicitly authorized. Each transaction should be initiated by a written request from the
user or department. In the case of high-value items, there should be an independent approval process that
evaluates the merits of the request.
Supervision Controls. Because capital assets are widely distributed around the organization, they are more
susceptible to theft and misappropriation than inventories that are secured in a warehouse. Therefore,
management supervision is an important element in the physical security of fixed assets. Supervisors must
ensure that fixed assets are being used in accordance with the organization’s policies and business practices.
Assets should not be removed from company premises without explicit approval.
94. Outline the key steps taken in a basic technology payroll system when preparing the weekly payroll for a
manufacturing firm.
ANSWER: Personnel action and time and attendance information from the personnel and production departments
respectively, initiate the payroll process.
The payroll department reconciles this information, calculates the payroll, and sends the paychecks to the
paymaster for distribution to employees.
Cost accounting receives information regarding the time spent on each job from production. This is used for
posting to accounts in the WIP subsidiary ledger.
AP receives payroll summary information (payroll register) from the payroll department and authorizes the
cash disbursements department to deposit a single check, in the amount of the total payroll, in a bank imprest
account on which the payroll is drawn.
The general ledger department reconciles summary information from cost accounting and AP. GL accounts
are updated to reflect these transactions.
95. Describe several technologies developed for producing the time and attendance file in a modern business
with telecommuting employees working from multiple locations.
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Chapter 06 The Expenditure Cycle Part II: Payroll Processing and Fixed Asset
Procedures
ANSWER: Biometric time clocks verify employees’ identities by using fingerprint or hand-vein scan technology. To protect
employee privacy, these devices use a mathematical algorithm for verification rather than storing actual
fingerprints in a database.
Magnetic swipe ID cards work like a credit card. Each employee is issued an ID card that has a magnetic strip
containing employee information. The employee swipes the card through the time clock to record start and
end time on the job. For additional verification, the employee may be asked to enter a password or PIN.
Proximity cards are similar to swipe cards but don’t require the user to slide the card through a reader.
Instead, the employee places the card in front of the reader to record attendance time. The advantage is that
these cards can be read through wallets, purses, and card holders.
Mobile remote devices allow employees to clock in using handheld devices (PDA or cell phone) or web
browsers from laptop computers. This option is popular among businesses with employees in the field who
travel between clients and with companies engaged in global business with foreign-based employees.